RMB Capital Proposed a New Outside Director to Faith

June 05, 2018 08:05 PM Eastern Daylight Time

CHICAGO--(BUSINESS WIRE)--RMB Capital (“RMB”), an independent, Chicago-based investment management
firm with approximately $9.1 billion in assets under management
(estimated as of March 31, 2018), filed its ownership of more than 11%
in Faith Inc. (4295 JP) in August 2017 and filed its shareholder
proposal to send Masakazu Hosomizu, RMB partner and portfolio manager,
as an outside director to the board of Faith on April 25, 2018. RMB
believes its proposal would protect minority shareholders’ interest and
enhance corporate governance at Faith and eventually improve the
corporate value of Faith.

1. Need to monitor the Faith management’s capital
policy from the shareholders’ viewpoint

RMB is concerned about Faith management’s capital policy, which has been
inconsistent. About a year ago, Faith’s management conducted a
stock-swap deal to fully acquire Nippon Columbia, which caused a
significant dilution of shareholder value. Management has not made any
strategic investments with the spared cash. Instead, they recently
decided to return capital through a 5% share buyback program. Further,
management’s description of their strategic investment policy has been
shifting as well. Last year, they claimed to initiate consolidations in
Japan’s fragmented music industry, where Nippon Columbia is a central
player. However, in their May 2018 analyst meeting presentation, this
statement is replaced with investments in what they call “destructive”
innovation, including block chain technologies. It could be
“destructive” for minority shareholders if management hastily invests
the cash in wrong places and overpays beyond the capital cost.

Validating the above concern, the losses at Faith’s content segment have
been widening in recent years under the name of new business
developments, and management expects as much as 66% decline in the
consolidated recurring profit this fiscal year. RMB is skeptical about
whether Faith’s management has a disciplined investment policy, has
evaluated the results of their investments in business development, and
is prepared to share those results with shareholders.

Under these circumstances, RMB believes sending its proposed candidate
as an outside director to monitor management’s decision-making process
would be in the best interests of Faith’s minority shareholders.

2. Need to build a strong corporate governance
system

RMB’s concern about Faith’s corporate governance system only increased
through negotiation related to its proposal. More specifically, RMB
found the board’s decision-making process is not transparent and
reflects a flawed corporate governance system. Because Faith does not
have a nomination committee, the board had to take initiatives to
consider RMB’s proposal. RMB requested an interview between its
candidate and Faith’s board of directors—namely, outside directors—that
would enable Faith to evaluate RMB’s proposed candidate. However, this
request was refused, preventing the ability to gain information for
minority shareholders.

In a May 22 press release, Faith announced its nomination of three
candidates for new outside directors. However, RMB is skeptical about
the independence of these candidates, who include an auditor of Nippon
Columbia (a 100% subsidiary of Faith) and an outside director of
Yoshimoto Kogyo (a shareholder and business partner of Faith), as well
as a corporate advisor to Pasona Group, which was founded by an ex-board
member of Nippon Columbia and had Faith’s founder as a board member.

As such, RMB believes Faith is failing to uphold a core tenet of the
corporate governance system with its selection of outside directors.
RMB’s proposed candidate would represent the minority shareholders’
interest as an outside director.

Faith’s management indicated it is skeptical about whether RMB’s
candidate would consider the interests of all minority shareholders and
not just those of a specific shareholder.

RMB believes “the specific shareholder” management should worry about is
Hajime Hirasawa, the founder CEO and the largest shareholder of Faith
with a 34% ownership. A strong corporate governance system has to be
installed to control the interest of such a “specific shareholder.” At
Faith, however, there are no nomination and compensation committees that
oversee management, and its outside directors are not functioning as
intended by the Corporate Governance Code. RMB’s proposed candidate is
truly independent from the founder CEO.

2. We should respect diverse opinions.

Faith’s management asserts that RMB’s proposed candidate “does not
understand the firm’s business policy” only because he has different
opinions. However, RMB believes diverse opinions are valuable in
constructive discussions to improve the corporate value of Faith.

3. Outside directors are not required to present “realistic, concrete
business plans.”

Faith’s management misunderstands the role of outside directors.

Corporate Governance Code by Tokyo Stock Exchange defines the roles of
outside directors in its Principle 4-7 as: i) Provision of advice on
business policies and business improvement based on their knowledge and
experience with the aim to promote sustainable corporate growth and
increase corporate value over the mid- to long-term; ii) Monitoring of
the management through important decision-making at the board including
the appointment and dismissal of the senior management; iii) Monitoring
of conflicts of interest between the company and the management or
controlling shareholders; and iv) Appropriately representing the views
of minority shareholders and other stakeholders in the boardroom from a
standpoint independent of the management and controlling shareholders.

Faith’s statement that RMB’s proposed outside director should present
“realistic, concrete business plans” is problematic. As clearly stated
in the Corporate Governance Code, the role of outside directors is to
monitor management. It is management’s responsibility to present
“realistic, concrete business plans.” Furthermore, the three outside
director candidates proposed by Faith’s management have not presented
any “realistic, concrete business plans”—nor should they be required to.

4. Outside directors are not likely to put management “in chaos.”

The role of outside directors is to monitor management through a
functioning corporate governance system while representing the views of
minority shareholders and other stakeholders. RMB’s proposed candidate
meets the qualifications to fill the position and has a clear
understanding from past discussions with the management. Further,
because the board decision is made by a majority voting, management will
not “be in chaos” as long as it presents plans that are reasonable from
the viewpoint of minority shareholders and other stakeholders.

About RMB Capital

Headquartered in Chicago, RMB
Capital is an independent investment and advisory firm that serves
high-net-worth individuals and families as well as institutional
investors. Its businesses include wealth management, family office
services, asset management, and retirement plan consulting. Its asset
management business specializes in long-term, concentrated, active
investing strategies with coverage that spans the market-cap spectrum
and the globe. To learn more about RMB, visit www.rmbcap.com.